Dulux finds Alesco hard to swallow

If there was any doubt that acquisitions rarely add value once acquired, the results of paint manufacturer Dulux Group (ASX: DLX) make it plain to see.

Despite revenues rising 39% to a whopping $1.5 billion, net profits slumped 14% to $77 million, well below the company’s forecast of $89 million in May this year. Disregarding the costs of the Alesco integration and other one-off costs, totalling $29 million, Dulux reported an underlying profit of $94.1 million. Operating cash flow barely moved, rising 1.7% to $118.2 million.

The Dulux division saw revenue growth of 5.5% and earnings before interest and tax (EBIT) growth of 7.9%. The company says the Alesco businesses saw EBIT rise 3.7% in weak, but improving markets. Much of Dulux’s and Alesco’s business is geared around new home construction, renovation and maintenance with the supply of products such as paint, garage doors and openers, industrial coatings and hardware and components for the cabinet and furniture industry.

Thanks to the acquisition of Alesco, net debt has climbed from $230.3 million in 2012, to $388.7 million, and leaving the company precariously exposed with earnings before interest, tax, depreciation and amortisation (EBITDA) only slightly more than 50% of its net debt.

While the Alesco acquisition makes Dulux more diversified in its product segments, Alesco was a poor business to start with, generating very low profit margins. It remains to be seen whether Dulux can improve those margins further.

Dulux’s businesses should benefit from the improving construction sector, and rising consumer confidence, like other suppliers to the industry including plumbing supplier Reece (ASX: REH), bathroom and housing accessories business GWA Group (ASX: GWA) and Hills Holdings (ASX: HIL).

Foolish takeaway

Trading on a trailing P/E ratio of 26 times and paying a dividend yield of less than 4%, Dulux appears expensive. Add in its debt situation and low profit margin, and this is one company Foolish investors might want to let through to the keeper.

There are better opportunities out there. Are you in the market for high yielding ASX shares? Get “3 Stocks for the Great Dividend Boom” in our special FREE report. Click here now to find out the names, stock symbols, and full research for our three favourite income ideas, all completely free!

Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.